On 22 July 2015, the Securities and Futures Commission (SFC) commenced proceedings in the Market Misconduct Tribunal (MMT) against AcrossAsia Limited (AAL), its chairman and its CEO for breach of disclosure requirements under Part XIVA of the Securities and Futures Ordinance (SFO).
This action is the first of its kind taken by the SFC under Part XIVA of the SFO since the provisions came into force on 1 January 2013. In this e-bulletin, we summarise the facts that led to these proceedings and set out our initial observations. In addition, we provide an overview of the key elements of the inside information disclosure regime.
2. BACKGROUND FACTS
AAL is an investment holding company listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (SEHK). Mr Albert Saychuan Cheok (Mr Cheok) is its Chairman and Mr Vicente Binalhay Ang (Mr Ang) is its Chief Executive Officer. AAL’s major asset and source of income is its majority shareholding in PT First Media Tbk (First Media), an Indonesia-listed company.
AAL entered into a loan facility agreement with AAL as borrower and First Media as lender on 30 June 2011 to borrow US$44 million. When the loan was unpaid after it fell due, First Media commenced Indonesian arbitration proceedings in August 2012 and obtained an award against AAL for the principal of the loan as well as interest (Award).
First Media subsequently applied to enforce the Award in an Indonesian court. When AAL failed to satisfy the Award, First Media filed an insolvency-related petition (Petition) on 20 December 2012. The petition sought a temporary moratorium on AAL’s debts in order for a composition plan to be drawn up, and for an Indonesian judge and administrators to be appointed to manage AAL’s assets. A summons was also issued for AAL to appear at the hearing of the Petition.
AAL received copies of the court documents in the original Bahasa Indonesian language on 2 January 2013. English translations were circulated to Mr Cheok, Mr Ang and AAL’s other officers on 4 January 2013. However, even though the Petition was granted by the Indonesian court on 15 January 2013, no announcement was made until 17 January 2013.
3. THE SFC’S ALLEGATIONS
The SFC alleges that the information in relation to the Petition was inside information, given that it was specific information not generally known to the public. It also noted that the information was “highly price sensitive”, as it could lead to seizure of AAL’s assets (including its shares in First Media) or further action leading to AAL’s winding up. In fact, the price of AAL’s shares dropped 22.5% upon resuming trading after the disclosure on 17 January 2013 was made.
AAL is alleged to be in breach of the disclosure requirements because it did not make a disclosure as soon as reasonably practicable. The information had come to Mr Cheok and Mr Ang in their capacities as AAL’s officers on 4 January 2013, and a reasonable officer would have considered it to be inside information. No disclosure was made until 17 January 2013, at the request of the SFC.
The SFC also alleges that the breaches were a result of the recklessness or negligence of Mr Cheok and Mr Ang, and therefore the current proceedings are also directed against them personally. This was especially so given that Mr Cheok and Mr Ang were in Indonesia from 8 to 15 January to attend the hearing of the Petition on behalf of AAL and should have understood that disclosure was required.
4. OBSERVATIONS AND TAKEAWAY POINTS
The action against AAL’s highlights (i) how an officer’s conduct may result in the company being in breach; and (ii) that an officer may be held personally liable for breaches of the requirements in Part XIVA of the SFO. The SFC has previously said that Part XIVA is mainly intended to catch listed companies and their senior management. Listed companies should have in place well-defined procedures for detecting, escalating and disclosing inside information. Their directors and other senior management should familiarise themselves with those procedures to observe the disclosure requirements and avoid becoming the “weakest link” and personally the subject of SFC action.
The action against AAL is the very first of its kind under the provisions of Part XIVA of the SFO. The way the SFC approaches the proceedings and the outcome and penalties (if any) of the case may give some indication of how the SFC and the MMT approach such breaches of disclosure requirements. We will provide updates when there are further developments in the case.
AAL’s alleged breach occurred on 4 January 2013, mere days after Part XIVA of the SFO became effective. Given that it has taken more than 2 years from the alleged breach occurring to proceedings being instituted in the MMT, this case is likely to be only the first in many more cases as the SFC completes its investigations into other suspected breaches.
5. OVERVIEW OF THE INSIDE INFORMATION DISCLOSURE REGIME
As explained in our e-bulletin of 11 December 2012 (which can be accessed here), the obligation on Hong Kong-listed companies to disclose inside information was statutorily codified in Part XIVA of the SFO and became effective on 1 January 2013. The relevant provisions in the Main Board Listing Rules and Growth Enterprise Market Listing Rules (collectively, Listing Rules) were updated at the same time to refer to an obligation to comply with the provisions in Part XIVA.
5.2 Meaning of “inside information”
Inside information was previously referred to as “price sensitive information” in the Listing Rules and “relevant information” in the SFO. These were all amended to “inside information” after Part XIVA became effective. Inside information refers to:
- specific information that is about a listed company, its shareholders or officers, or its listed securities or their derivatives;
- not generally known to persons who are accustomed or would be likely to deal in the listed securities of the corporation;
- but, if generally known to those persons, would be likely to materially affect the price of the listed securities.
The SFC does not provide a definitive list of what constitutes inside information. However, it has given examples of events or circumstances likely to constitute inside information, including:
- changes in the current or expected performance, or financial condition, of the business, particularly significant increases or decreases in profit or earnings;
- changes to the core business areas of the company or its investment policies;
- changes to the value of assets or property;
- changes in relation to the indebtedness or credit facilities of the company or its debtors;
- changes to the company’s officers or auditors;
- legal disputes and proceedings, including insolvency proceedings involving the company;
- restructuring or reorganisation of the company, or changes in its share capital or securities; and
- actual or proposed acquisitions or disposals in the company, or its subsidiaries or assets.
5.3 Obligation to disclose inside information
Inside information must be disclosed to the public as soon as it is reasonable to do so after it comes to the listed company’s knowledge. This includes where the information has come, or ought reasonably to have come, to the knowledge of an officer in the course of his/her duties.
The regime uses an objective test to determine what constitutes inside information: disclosure is necessary if a reasonable officer would consider it to be inside information. A mere opinion or belief, or “business judgment” of the officer, is not sufficient to justify non-disclosure.
The duty also extends to the company’s officers personally (including directors, company secretaries and other management), who must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of the disclosure requirements. Additionally, if a company is in breach of a disclosure requirement and the breach resulted from an officer’s intentional, reckless or negligent conduct, that officer will also be in breach of the requirement.
5.4 Exceptions to disclosure
The regime operates a number of “safe harbours” from disclosure. Disclosure is not required:
- if there is any Hong Kong legislation or a Hong Kong court order prohibiting disclosure;
- for information concerning (i) incomplete proposals or negotiations or (ii) trade secrets, if the listed company takes reasonable precautions for preserving the confidentiality of the information, and confidentiality is in fact preserved; or
- if the SFC grants a waiver after being satisfied that disclosure would breach foreign legislation or court orders or restrictions imposed by foreign governments or regulators.
5.5 Sanctions for non-disclosure
Under the statutory regime, the SFC is empowered to investigate breaches of Part XIVA of the SFO like other breaches of the SFO. Additionally, the SEHK has the power to investigate breaches of inside information disclosure obligations, as they also constitute a breach of the Listing Rules.
The SFC may institute civil proceedings in the MMT against listed companies and their officers for failing to disclose inside information. Upon finding a breach, the MMT may order sanctions including:
- director disqualification orders (for up to five years);
- “cold shoulder” orders not to trade without court permission (for up to five years);
- fines of up to HK$8 million;
- referrals to professional bodies for disciplinary action;
- cease and desist orders;
- orders to pay the MMT or the SFC’s costs; and
- orders for directors or officers to undergo training programmes approved by the SFC.
All findings and determinations of the MMT, as well as the SFC’s notices commencing proceedings, are published on the MMT’s website and are available to view by the public.